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Web Alert: Clarification on consequential losses - Transocean Drilling UK Ltd v Providence Resources plc

10 November 2016

 

The Court of Appeal’s decision in the case of Transocean Drilling UK Ltd v Providence Resources plc is now a binding decision as permission to appeal to the Supreme Court is refused.

Facts

In April 2011, Transocean Drilling UK Ltd (Transocean) entered into a contract with Providence Resources plc (Providence) for the provision of a drilling unit, GSF Arctic III. The unit was employed to drill an appraisal well in the Barryroe Field in Ireland.

As a result of issues with the blow-out preventer stack, drilling operations were suspended. Transocean claimed that it was entitled to remuneration during the period of delay. However, Providence considered that it was entitled to recover spread costs as a consequence of the extended period of work and could set off those costs against any remuneration due to Transocean.

The dispute in relation to the spread costs fell on whether they were excluded under clause 20 of the contract which provided that recovery by either party of the following liabilities was excluded:

'(i) any indirect or consequential loss or damages under English law, and/or

(ii) to the extent not covered by (i) above, loss or deferment of production, loss of product, loss of use (including, without limitation, loss of use or the cost of use of property, equipment, materials and services including without limitation, those provided by contractors or subcontractors of every tier or by third parties), loss of business and business interruption, loss of revenue (which for the avoidance of doubt shall not include payments due to [Transocean] by way of remuneration under this CONTRACT), loss of profit or anticipated profit, loss and/or deferral of drilling rights and/or loss, restriction or forfeiture of licence, concession or field interests'

The Commercial Court decision

The court found that spread costs fell outside of the exclusion clause. In reaching the decision, the Judge highlighted that in accordance with the contra proferentem rule, the clause should be construed against Transocean as the party seeking to rely on the exclusion.

Transocean appealed against the court’s interpretation of the consequential loss clause.

The Court of Appeal decision

The Court of Appeal overturned the Commercial Court’s decision. It found that the Commercial Court Judge had not fully considered the words in brackets which were not intended to limit the scope of 'loss of use' but were a means of providing examples to explain and amplify the scope of 'loss of use'.

The court set out that the exclusion clause should be construed and interpreted in accordance with the following:

  1. The starting point in interpreting all clauses is to give the words their natural and ordinary meaning.
  2. The contra proferentem rule is only relevant where the clause is ambiguous and the language used appears to favour one party.
  3. An exclusion clause such as the one in this case should not be restrictively interpreted where part of a wider allocation of risks between two parties of equal bargaining power.
  4. Provided that the intention of the parties is clear from the language used, a clause can override the presumption that a party would not intend to give up its contractual rights. 

The court emphasised the importance of freedom of contract. Consequently, it should give effect to the parties’ intention, particularly where they are of equal bargaining power, and not intervene unless necessary.

Comment

Providence sought permission to appeal against the Court of Appeal’s decision. However, the Supreme Court has refused to grant permission which means that the Court of Appeal’s decision stands. This is good news for our contractor members, but the Court of Appeal indicated that the position may have been different if the clause only referred to 'loss of use'. This is a helpful reminder that each case will turn on its own facts and the specific words in the clause, so it is essential to draft exclusion clauses clearly and avoid any ambiguity. ​